Small businesses face surge in loan defaults as lenders 'forget how to price risk'

LOAN default rates could rise dramatically among small businesses because lenders have “forgotten how to price risk”, according to Hitachi Capital Business Finance managing director Gavin Wraith-Carter.

Loan default rates could dramatically rise according to Gavin Wraith-Carter

Default rates are currently at historic lows for banks and other specialised lenders to small to medium-sized enterprises (SMEs), but Wraith-Carter predicted this will go up by several multiples, as banks have been fooled by the low interest rate environment, which has kept default rates low.

He said: “We’ve forgotten what normal looks like, especially in asset finance. There is a reckoning coming. What we see is that a lot of people have forgotten what happened in 2005, 2006 and 2007.”

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Hampshire Trust Bank chief executive Mark Sismey-Durrant said that SMEs should brace themselves as credit costs could soon rise, as pressure builds on the Bank of England to raise the base rate to take the sting out of rising inflation.

“Credit conditions have been good for the last few years, but the thing is a lot of SMEs have never seen a normal interest rate environment,” he said.

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The Hitachi director claims banks have forgotten how to price risk

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Royal Bank of Scotland last week failed a stress test

Elsewhere, Royal Bank of Scotland last week failed the Bank of England’s stress tests, which measure a bank’s ability to weather a financial crash.

The management team are actually doing a good job, but they have been dealt a duff hand

Banking analyst Rob James

As a result, the bank has set out to raise £2billion to boost its reserves by selling off businesses and cutting costs.

Old Mutual Global Investors banking analyst Rob James said investors should steer clear as the Government’s 73 per cent stake and the prospect of huge fines for mis-selling mortgage bonds in the US were suppressing the shares: “The management team are actually doing a good job, but they have been dealt a duff hand.”